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Brief Exercise 21A-11 Assume that IBM leased equipment that was carried at a cost of $97,000...

Brief Exercise 21A-11

Assume that IBM leased equipment that was carried at a cost of $97,000 to Crane Company. The term of the lease is 5 years December 31, 2016, with equal rental payments of $29,955 beginning December 31, 2016. The fair value of the equipment at commencement of the lease is $127,000. The equipment has a useful life of 5 years with no salvage value. The lease has an implicit interest rate of 9%, no bargain purchase option, and no transfer of title. Collectibility of lease payments for IBM is probable. Assume the sales-type lease was recorded at a present value of $127,000.

Prepare IBM’s December 31, 2017, entry to record the lease transaction with Crane Company. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

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Answer #1

1.) 31 dec 2017

Cash a/c .......dr. $29,955

To lease recievable........cr. $21,221

To Interest income.........cr. $8,734

(Being the lease payment recieved and intrest earned)

The amount of payment recieved is mentioned @ $29,955 to be constant throughout the lease period.

The amount transferred to lease recievable is the net amount after interest earned.i.e. $29,955 - Intrest income

Intrest Income - (Lease value at the time of start of lease - paymnet made in the last year) * Implicit interest rate

= ($127,000 - $29,955) * 9% = $8,734

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